Case 2- 1: Maynard Company (A)

OUR OBJECTIVE IS TO LOOK AT THE CONCEPT OF BALANCE SHEET

AND NOT THE FORMAT OF THE BALANCE SHEET

(Which Varies in different GAAPs )

NEXT : MAYNARD “B”

Question 1
Two suggested balance sheets as required by Question 1 are shown below.

Question 2
 To step back and think about the information in a financial statement,
rather than focusing on the details of constructing a financial statement.

 To identify which accounts have changed significantly between the

beginning and ending balance sheets. These would include accounts
receivable, note receivable, equipment, accounts payable, taxes payable,
and the bank note payable, in addition to the cash account.

 . Cash has increased largely due to increased accounts and notes

payable, as well as cash generated by operations. Cash appears to have
been increased by the collection of the note receivable, but as explained
in Question 3 below, this was offset by the declaration of an identical
dividend, so that the net effect on cash of these two transactions was
zero.

 Equipment purchases were a major use of cash. As a result of these

events, the June 30 current ratio has fallen to 2.15 from its June 1 level

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 of 4.35. Even though the leverage ratios have not yet been introduced in
the LECTURES, the students MUST observe that the proportion of
liabilities on the right-hand side of the balance sheet has increased, with
a complementary decrease in the proportion of equities.

Question 3
Retained Earnings has not increased by the amount of net income for the
month, $19,635, since Diane Maynard as the sole shareholder declared a
dividend of $11,700, which she then used to cancel her loan of $11,700 from
the company. Hence, Retained Earnings increased by $7,935 during the month
of June.

Question 4

This question is intended to emphasize early in the course that shareholder’s

equity does not necessarily reflect what the entity is worth.

 Estimate the cash proceeds of piecemeal sale of the assets by a

liquidation company, which, net of liabilities, will certainly be less than
$619,446. Then the value of the company as a going concern can be
discussed; if June’s $19,635 net income is typical, the firm would be
worth more than $619,446 as a going concern.

 Capitalizing June’s net income on an annual basis ($19,635 x 12) at 10

times earning gives the company a value in excess of $2 million. This is
not a typical business. It is better.

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 MAYNARD COMPANY
BALANCE SHEETS AS OF JUNE 1 AND JUNE 30
Assets
Current Assets: As of June I As of June 30:
Cash $ 34,983 $ 66,660
Accounts receivable 21,798 26,505
Note receivable 11,700 0
Merchandise inventory 29,835 26,520
Supplies on hand 5,559 6,630
Prepaid insurance 3,150 2,826
Total current assets 107,025 129,141
Noncurrent assets:
Land 89,700 89,700
Building 585,000 585,000
Less: Accumulated depreciation..........................................................................................
(156,000) 429,000 ( 157,950) 427,050
Equipment 13,260 36,660
Less: Accumulated depreciation..........................................................................................
( 5,304) 7,956 ( 5,928) 30,732
Other non current assets 4,857 5,265
Total non current assets 531,513 552,747
Total assets 638,538 681,888

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 Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable................................................................................................................................
$8,517 $ 21,315
Bank notes payable.............................................................................................................................
8,385 29,250
Taxes payable......................................................................................................................................
5,700 7,224
Accrued wages payable......................................................................................................................
1,974 2,202
Total current liabilities...................................................................................................................
$ 24,576 $ 59,991
Other noncurrent liabilities...............................................................................................................
2,451 2,451
Total liabilities.................................................................................................................................
27,027 62,442
Shareholders’ Equity:
Capital stock........................................................................................................................................
390,000 390,000
Retained earnings...............................................................................................................................
221,511 229,446
Total shareholder’s equity..............................................................................................................
611,511 619,446
Total liabilities and shareholders’ 638,538 681,888
equity............................................................................................................................................